VAT in UAE: Experts worry that companies are not ready

Tax experts are concerned that companies are not ready for the introduction of value added tax on January 1.There is particular concern that small to medium enterprises (SMEs), which account for more than 60 per cent of GDP, are not properly prepared for the roll-out of the 5 per cent levy.In August, Khalid Al Bustani, the director general of the Federal Tax Authority said he had hoped that around 350,000 companies would have registered with the authority by the end of the year.However, the authority has yet to publish any figures and it did not comment when approached by The National.

“My feeling is that a relatively large number of companies in the UAE may not be completely ready on January 1 but the work that is being done now should hopefully position them well – at least in the first quarter of 2018,” said Ton van Doremalen, tax advisor at law firm DLA Piper Middle East.The UAE, along with five Arabian Gulf states, are introducing taxes to create new revenue streams that will shore up dwindling government revenue from oil. The UAE economy minister Sultan Al Mansouri has estimated that VAT will generate Dh12 billion in its first year of implementation and Dh20bn in its second year. The levy, however, is expected to increase consumer prices by around 1.4 per cent, Minister of State for Financial Affairs Obaid Al Tayer told the Federal National Council this week.But companies are ill-prepared because some waited too long to comply with VAT, particularly SMEs, which didn’t have the bandwidth or the resources of their larger peers.

“Most of them have done very little and are not very prepared. The main reason was they were waiting for the laws and regulations, and the laws and regulations took some time to finalise,” said Shiraz Khan, senior tax advisor at law firm Al Tamimi & Company. “There was a lot of work that all businesses could have done before the laws and regulations were issued to help their preparation and they could have made assumptions and validated those assumptions.”“The challenge for all companies at the moment is to finalise systems configuration and testing to ensure the requirements are set up properly and allow them to comply by January 1, 2018 and file their first VAT return in a timely and accurate manner,” said Jeanine Daou, Middle East Indirect Tax Leader at PricewaterhouseCoopers.

The shape of the tax, which is fleshed out in a GCC-wide agreement struck in 2016, has also diverged from initial reports that talked about exempting some food items, to the surprise of some experts, who also point out to the relatively short period of preparation for the tax.“It (VAT) is probably the most significant economic and financial transformation that the UAE has witnessed to date, therefore it will require businesses and the new tax authority to almost start from scratch in terms of their capabilities on VAT and tax compliance,” said David Stevens, GCC VAT Implementation Partner at Ernst and Young. “That is challenging to do and even more challenging to do within a short period of time.”Although the UAE held workshops and awareness campaigns about VAT, it only started publishing tax laws in the summer.

“New Zealand, Singapore, Australia ,Canada , Malaysia and Hong Kong, are some of those jurisdictions that had a period ranging from 6-12-18 months before the tax was introduced. We are working on timeline of six months since the law was announced,” said Mr Stevens. “However, there are many other jurisdictions that have done this in a much shorter period of time such as India and Egypt.”Even after the publication of the laws, their clauses are stirring debate.In 2015, UAE officials were talking about exempting 94 food items from the levy, but in the end the only exemptions are those that will be applied to the supply of some financial services, residential properties, bare land and local passenger transport. The GCC Unified Agreement for Value Added Tax had allowed member states to zero-rate some food items.

Businesses exempt from the VAT will not be able to recover the tax incurred on the cost of an item or a service that is not exempt from the government and it will be up to the business to decide whether to pass on the VAT cost to the consumer. But when businesses have zero-rated services and goods they can reclaim from the government any VAT they have paid on costs.“Each country had the discretion to zero-rate food, however both the UAE and Saudi Arabia will be taxing food. The reason for that is that the VAT rate is very low and to actually establish a criteria under which food would be taxed or not taxed would be very, very difficult,” said Mr Khan.The tax rate in the GCC is the lowest in the Middle East and North Africa region, and among the lowest in the world. The European Union VAT rate is an average of about 20 per cent, with each state having to levy a minimum of 15 per cent.Unlike the EU, the six GCC states have agreed on a unified rate of 5 per cent but only Saudi Arabia and the UAE have committed to introducing the tax on January 1. The other states have yet to publish VAT laws or give a timeline for implementation.Although the GCC VAT agreement is overarching, the member states will issue their own VAT laws to help with implementation of the levy. But the country-level laws are expected to undergo changes while adhering to the GCC framework agreement.

“It’s possible that interpretation by the respective revenue authorities and the courts could leave the systems looking very different in a few years,” said Jeremy Cape, a London-based tax and public policy partner at law firm Squire Patton Boggs.VAT laws in maturing jurisdictions continue to evolve and this is likely to be the case in the UAE, particularly as neither the authorities nor business are used to taxes. The UAE’s tax system remains in its infancy, with only certain companies in the energy sector and branches of foreign banks being taxed.“The tax authority has obviously made a lot of guidance available but some things will be tested as and when the tax authority becomes aware of them,” said Mr Khan. “Disputes will develop; cases will be heard but not probably before 2019-2020. All of this takes time and this is just the beginning.”